CityCenter contingency plan emerges; investor shows interest

By Liz Benston

Published Wednesday, April 1, 2009 | 4:23 p.m.

Updated Wednesday, April 1, 2009 | 5:49 p.m.

The drama surrounding the financially troubled CityCenter project has thickened, with a major investor interested in the $8.7 billion project and MGM Mirage disclosing a contingency plan should CityCenter seek bankruptcy protection.

In a regulatory filing today, MGM Mirage said its bank lenders have allowed the company to earmark up to $20 million for expenses "necessary to ensure public health, safety and welfare or regulatory compliance in connection with CityCenter Holdings."

A source close to MGM Mirage, who declined to be identified, said the safety fund isn't an indication that a bankruptcy filing is imminent for CityCenter. However, the source said the fund would allow for a pause in construction should the CityCenter partnership need to seek bankruptcy protection.

The $20 million fund is an indication that Chapter 11 bankruptcy protection may come soon for CityCenter, which is owned by 50 percent partners MGM Mirage and Dubai World.

The fund would allow CityCenter to wind down while its debts are restructured. It would also allow for the project to resume in an orderly fashion while it proceeds through the bankruptcy reorganization process, the source said.

MGM Mirage spokesman Alan Feldman declined comment on the filing other than to say that the company continues to negotiate with banks to find a funding solution for CityCenter.

Another option besides bankruptcy is that a third party could step in to fund CityCenter. Today, sources familiar with those negotiations said Colony Capital – the private equity firm that financed the management-led buyout of Station Casinos – has expressed interest in investing in CityCenter or brokering some kind of agreement between MGM Mirage and Dubai World. Those discussions are "very preliminary," a source said.

Representatives for Colony, MGM Mirage and Dubai World declined comment on Colony's interest in CityCenter.

"Talks are being held with a number of potential investors in a cooperative fashion but so far none are particularly close to a resolution," according to a source with Dubai World who declined to be named.

Like many real estate funds, Colony has been hard hit by the economic downturn, while Station, sustaining steep losses in the recession, is close to filing for Chapter 11 bankruptcy protection. Colony also has stopped making mortgage payments on its Resorts Atlantic City casino, which could trigger foreclosure by lenders.

Like many real estate funds, Colony has been hard hit by the economic downturn, while Station, sustaining steep losses in the recession, is close to filing for Chapter 11 bankruptcy protection.

Half-finished buildings have continued under Chapter 11 bankruptcy protection, as borrowers are still required to pay creditors while they restructure debts in bankruptcy court, local bankruptcy experts say.

The stakes are high for CityCenter, the nation's largest privately-financed construction project. More than 8,000 construction workers are building CityCenter, which is expected to employ more than 10,000 people when it opens in late 2009.

Both partners say they have an economic interest in finishing CityCenter, in spite of the global recession and the damage it has done to both companies, because the project is so far along in the construction process.

The partnership still needs at least $1.8 billion in financing to complete CityCenter at a time when banks have pulled back on lending and Dubai World appears unwilling to make future payments to fund it.

Dubai World sued MGM Mirage last week, saying MGM is on the verge of bankruptcy and its $4.3 billion investment is at risk. Dubai World claims MGM Mirage mismanaged CityCenter, leading to cost overruns.

The regulatory filing contains details of the waiver MGM Mirage received from bank lenders to make a required $200 million payment that was due Friday.

MGM Mirage made its $100 million payment as well as another $100 million on behalf of Dubai World, which refused to put in its share.

The waiver expires April 13, which is when the next monthly payment by both MGM Mirage and Dubai World is due.

Given that Dubai World has criticized the way MGM Mirage has managed CityCenter, the company may decide not to make that payment, which would require MGM Mirage to come up with the money or trigger a bankruptcy filing by CityCenter.

Bailing out CityCenter isn't a permanent solution for MGM Mirage, which is also facing bankruptcy protection as it scrambles to raise cash needed to make upcoming debt payments. The company, which recently sold its Treasure Island casino, is considering other casino sales to fund operations and prepare for a debt payment of more than $1 billion coming due later this year.

MGM Mirage would require another waiver from its bank lenders to make the next payment April 13.

Even if MGM Mirage can dig up more cash to make that payment, Chapter 11 bankruptcy may be unavoidable for MGM Mirage unless the company can sell significant assets quickly or a benefactor comes to the rescue, analysts say. A Chapter 11 filing by MGM Mirage could trigger a bankruptcy filing for CityCenter, whose lenders are some of the same companies that have loaned money to MGM Mirage.